Overview

The data revolution is pushing fixed and mobile operators across developed and emerging markets to roll-out FTTH/B as customers use video and cloud services across multiple devices.

Fixed operators facing stable or declining revenues and increasing operational costs (driven by legacy services and technologies) have embarked on comprehensive transformation programmes (see Delta Partners’ white paper, “The new era for fixed operators in emerging markets”). One of the key pillars of these transformation programmes is the FTTH/B rollout, which enables a superior value proposition, is future-proof and permits operators to simplify the network and optimise network operations. These rollouts are substantially advanced in China, Hong Kong, Japan, the USA and EU and GCC countries but are also in progress in countries including Brazil, Colombia and South Africa.

Meanwhile, “pure” mobile operators are also considering (and in some cases already rolling out) FTTH/B. In developed markets, the rationale is to defend against incumbents’ 4/5P offers (e.g. Vodafone Portugal). In emerging markets however, the rationale is to capture untapped growth potential in the home and SME segments (e.g. Turkcell, Mobily, Maxis Malaysia and MTN in South Africa and Nigeria) and to optimise investments in LTE networks (reducing macro sites) by enabling a strong converged offer.

Customers are clearly adopting the services with initial rollouts having already achieved healthy take-up rates, with more than 50% of homes passed having been converted into customers in some markets.

However, operators that have embarked on FTTH/B rollouts face significant challenges. The most significant is the business case, which is characterised by high investment, longer-term returns and high sensitivity to ARPL and take-up assumptions. Also, in cases where more than one operator embarks upon rollout at the same time, or where established cable operators exist in the market, meeting take-up expectations can be difficult. Finally, the operator may find itself constrained by its ability to create a strong content and VAS offer supported by an operator-controlled platform.

This is as much a challenge in emerging markets as in advanced markets, where operators find themselves competing not only with each other, but also with OTT players such as Google, Amazon, Netflix, Apple and Samsung who eagerly await a “bandwidth war” to enable higher adoption of their services.

Lastly, operators face a significant execution challenge which requires their organisation to master, often under significant time pressure, a coordinated rollout of network, service portfolio and sales channels.

In this whitepaper we provide a view of the current rollouts of FTTH/B, explore the business plan challenge and elaborate on the seven key success factors that an operator needs to consider in a FTTH/B rollout.

Operators are rolling out FTTH/B across developed and emerging markets

Fixed and mobile operators are rolling out FTTH/B across developed and emerging markets.

The evidence is clear: FTTH/B is becoming a reality (see Exhibit 1).

Wealthy countries including South Korea, Hong Kong and the UAE already have high FTTH penetration as a percentage of fixed broadband connections, while countries such as China (the largest country by subscribers), Lithuania, Romania and Bulgaria are gaining prominence through the support of strong government incentives.

According to NetIndex1, five of the world’s top ten cities by average downlink speed fall within Lithuania, Bulgaria or Romania, the others being Hong Kong, Singapore, Seoul and Taipei. The top 30 ranking includes cities in Russia, Latvia, and Portugal, as well as from some other developed countries such as the Netherlands, Denmark, Sweden, Japan, France and UK.

Notably, there are no cities in the USA (“the centre of the digital economy”), Germany or Italy. It comes then as no surprise that Google is trying to heat up competition for AT&T, Verizon and Comcast by rolling out FTTH/B in Kansas City and Austin with other cities being announced. Just one week after this announcement, AT&T announced their own 1Gbps FTTH rollout in Austin, suggesting that it is indeed feeling the competitive pressure.

However, even those remaining low penetration markets are following the FTTH/B global trend. Operators in developed countries including Germany and Spain and in emerging markets including most LatAm countries, Saudi Arabia and South Africa have also recently declared their intentions to roll-out.

Furthermore, despite the high investment required, FTTH/B rollouts are not the exclusive domain of fixed incumbents. Evidence shows that simultaneous, competitive rollouts are occurring in many markets, with mobile operators such as Vodafone in Portugal, Turkcell in Turkey, Mobily in Saudi Arabia, Etisalat and MTN in Nigeria, and Vodacom and MTN in South Africa deploying or about to deploy their own infrastructure.

Insight for operators: Both fixed and mobile operators need to deploy FTTH/B to defend against a convergent strategy leveraging FTTH/B.

Customers are signing up for FTTH/B services

There are already more than 100 million FTTH/B subscribers in the world, of which more than 65% are in Asia and more than 7% are in EU27 countries. In Exhibit 3 we present information from some of the reference FTTH/B rollouts. The take-up achieved (customers as a percentage of homes passed) shows that customers are welcoming fibre services. According to our research, early FTTH/B rollouts have secured a take-up rate of 15-30% within four years of rollout (e.g. Verizon, Turkcell Superonline) and 35-70% within eight years of rollout (e.g. Altibox, HKBN).

This high take-up of FTTH/B is despite the ability of VDSL2 and cable (DOCSIS 3.0) to deliver the bandwidth required for most services. This is a function of the superior quality-of-service provided by fibre connectivity (GPON/NG-PON2 and Active Ethernet) which.

That said, in most developed markets, FTTH/B offers must be attractive in order to churn clients from established cable operators. Verizon, Portugal Telecom and, more recently, Telefonica4 have shown that it is possible for converged operators to gain significant market share in pay-TV and fixed broadband while reducing churn by offering state-of-the-art, competitive 4/5P offers. This is the main reason why mobile operators such as Vodafone have opted, in selected markets, to roll-out FTTH/B and why some cable operators consider deploying MVNOs or integrating with mobile operators (e.g. Zon and Optimus in Portugal, and potentially NET and Claro in Brazil).

Insight for operators: 4/5P convergent offers anchored in FTTH/B will be critical across developed and emerging markets.

Operators are gaining market share

Although still in the early stages, evidence suggests that operators rolling out FTTH/B are gaining market share (see Exhibit 4) and, more importantly, growing revenues. For example, Portugal Telecom’s and Telefonica’s Q4’12 results5 in their home countries show positive trends in their respective Meo and Fusion services6: FTTH is a key driver of these services.

FTTH/B business case: Fixed incumbents have an advantage

High investment with long-term return

Most fixed incumbents^7 in developed markets have been hesitant to roll-out FTTH/B due to the significant investment required to compete with the existing coverage of cable operators (typically more than 60%-70% of homes). Investors also have doubts: a recent report by Goldman Sachs on Verizon’s US fibre rollout concluded that the business case only achieves free cash flow breakeven in the longer-term (over five years) and returns negative cumulative NPV over the first ten years of investment.

The economic reality is that FTTH/B investment varies from US$600-2,000 per home connected. For a typical greenfield rollout, the investment ranges from US$800-2,200, of which trenching and in-buildingor in-community cost represents more than 70%. The average FTTH/B revenue per line is only US$17 higher than the average DSL revenue per line (according to statistics from the FTTH Council Europe).

Part of this ARPL increase is due to self-selection, i.e. high ARPL customers migrating to fibre, the remainder from real ARPL increase. If one considers the real ARPL increase to be US$8-9, then the typical rollout would require an investment payback period greater than ten years (in Exhibit 5 we present one emerging market example). However, evidence shows that in the case of very competitive conditions, the ARPL of FTTH/B may actually be lower than the initial DSL ARPL.

Country demographics, housing type, infrastructure conditions (street and in-building/in-community) and rollout extent explain the broad range. Operators rolling out in dense cities and with access to existing ducts (or over the air) face more favourable conditions and can potentially roll-out for as low as US$200-400 per home passed although operators rolling out in cities with low density and requiring trenching will likely face costs above US$800 per home passed (see Exhibit 5).

In situations with low density and unfavourable infrastructure conditions, the key questions for operators should be, “Where should we roll-out?”, and, “How can we accelerate take-up and secure high ARPL?” In the case of competing rollouts in the same geography, the operator should also consider the following two questions: “Should we partner to share infrastructure costs?”, and; “Should we wholesale to discourage competitive rollouts?”

Government support can help, but can be risky for operators if not properly managed

Governments around the world are looking to FTTH/B and national fibre backbones as key infrastructure to support economic and social development.

Consequently, governments have intervened in countries including Japan, Lithuania, Malaysia, Portugal, Singapore, South Korea and the UAE. Homes passed in these countries range from 47% in Sweden to 95-96% in South Korea and Lithuania. Such intervention can take multiple forms, from infrastructure funding to market regulation (e.g. duct or connectivity wholesale) or building legislation.

Initial evidence from comparing the above countries with countries where government has provided little or no support (such as Denmark, Germany, Hong Kong, Norway and the USA) suggest that the key benefit of intervention is a much higher percentage of homes passed – the price of 2P offers tends to be very similar and driven by economics in viable areas.

Insight for operators: Government support presents clear benefits from a duct (street and in-building) availability and infrastructure sharing legislation perspective.

Fixed incumbents have a more compelling business case as FTTH/B drives operational efficiency by enabling the decommissioning of legacy services and technologies

Fixed incumbents, alternative fixed operators and mobile operators are all rolling out FTTH/B but the business case for an incumbent fixed operator is much more compelling.

The fixed incumbent business case is fundamentally based on deploying two very efficient and future-proof networks: 1) FTTH/B for residential and SME customers, and: 2) Metro Ethernet (“ME”) for corporate customers and mobile transmission8. This simultaneous rollout allows operators to “right size” their network and operations. Real-world examples have yielded multiple benefits including reducing the number of exchanges by more than 70%, significantly reducing the number of remote sites (especially versus VDSL rollouts which increase the number of remotes) and decommissioning legacy technologies and services. All this reduces network operation costs (e.g. rentals, maintenance, power and – ultimately – operational staff).

The only caveat underlying these improved efficiencies and their bolstering of the fixed incumbent business case is that the benefits can only be fully realised when the operator successfully migrates all their customers within a significant geographical area to FTTH/B, ME or LTE/HSPA+. This gives rise to very aggressive migration strategies, in most cases with a price reduction on FTTH/B and ME services when compared to legacy services. This process must be carefully managed to prevent revenue erosion in the enterprise and wholesale segments.

Insight for operators: Fixed incumbents may need to become very aggressive in migrating customers to FTTH/B and LTE/HSPA+ to realise targeted operational benefits.

FTTH/B rollout: Execution is key.

Given the high network investment and the complexity of quickly deploying an FTTH/B network, a corresponding commercial offer and its supporting enablers/operations, operators should create a pseudo start-up organisation in the form of a strong programme management office to drive and coordinate the venture into fibre.

The programme management office leadership should report into a steering committee including the operator CEO, CFO and CTO/CIO. The heads of retail (Residential and Business) should also be present.

Based on Delta Partners’ experience in supporting FTTB/H rollouts both with fixed incumbents and mobile operators in emerging markets spanning four continents, we have identified seven key success factors on which the programme management office leadership must place particular focus.

1. 4/5P offering with VAS for residential and SME

To ensure rapid take-up of subscribers with high ARPLs, operators need to deploy a strong convergent offer and an innovative service roadmap for the Residential, SME and Corporate segments to differentiate from the xDSL and cable offerings.

To position fibre as the premium technology, the broadband offer must be established as (and must remain) the reference in the market. Voice is always present in incumbent offers to enable disconnection of the PSTN services. Pay-TV is also fundamental, in particular when competing with an established cable operator. Our research shows that more than 85% of FTTH/B connections include voice services and more than 65% IPTV services.

In addition, content and VAS associated with operator platforms and cloud are essential for maximising take-up by further differentiating fibre services from the competition. Also, bundling with mobile services further accelerates take-up through additional discounts and the enablement of Wi-Fi offloading for tablets and smartphones (see Exhibit 8). It also has the added benefit of locking in the customer as 4/5P offers tend to have lower churn.

Operator set-top boxes - platforms to aggregate content (international and local) and VAS - are a must to further differentiate from xDSL and cable players, with many operators integrating OTT services into their offer and enabling apps. Furthermore, for operators facing difficulty securing access to content, alliances with smart–TV manufacturers and OTTs (e.g. Netflix, Samsung and Google TV) may prove to be effective in combating strong pay-TV players.

For the SME segment, the offer should include cloud services ranging from unified communication services to software as a service (SaaS).

Bundling FBB and MBB is crucial given the consumer demand to offload tablet/smartphone mobile data. A recent report by Bank of America Merrill Lynch indicated that smartphone and tablet users are increasingly using Wi-Fi as a cheaper alternative to mobile data. 5P offers (including mobile voice) are also an option, but are more typically used in hyper-competitive markets when operators need to defend or increase share in mobile voice.

Insight for operators: The commercial team needs to define and implement a comprehensive roadmap of innovative content and value-added services to drive take-up and defend against competitive rollouts of FTTH/B.

2. Pre-registration and cross-selling to reduce risk

The sales machine is very important in achieving rapid take-up. Given the geographical nature of network rollout, sales channel deployment also needs to be geo-focused and synchronised with the new network rollout. Pre-registration campaigns, door-to-door efforts and cross-selling to an operator’s fixed and mobile customer bases not only help drive sales, but also help validate demand assumptions to better target network deployment. Partnerships with real estate developers and property administrators can also help up-sell to their tenants and greatly expedite final installation once orders are made.

In some cases operators have deployed pre-registration campaigns with trigger targets to decide on go/no-go in specific areas. Apart from reducing risk, this type of campaign also serves to generate awareness and interest ahead of rollout (e.g. Google’s recent pre-registration campaign).

Insight for operators: Pre-registration, cross-selling within the customer base and full coordination between sales and network are key success factors.

3. Customer experience driving operational requirements

Once the rollout is in progress and customer interest generated, the operator needs to master the conversion of interest into orders and service activation. The operator needs to be able to deliver service activation within a week from ordering if the home is already passed and within 24 hours if the home is already connected. To achieve this operational standard, a dedicated customer care team must coordinate an automatic workflow from ordering to validation of successful activation (including migrating the voice service from copper to fibre). This first interaction with the operator’s fibre service will leave a lasting impression in terms of quality, so should be a priority for the customer care team.

Employing customer self-care portals, for example to upgrade services or subscribe to content and value-added services, can help alleviate the operational burden on operators and improve customer experience if properly executed.

Insight for operators: Minimise the time between any request for information, sales order and activation of services to improve the customer’s first interaction with the fibre services.

Given the high investment per home and the trend for simultaneous FTTH/B rollouts, the selection and prioritisation of the deployment areas is make or break in terms of return on investment.

In a non-competitive rollout scenario, geographical selection is a function of expected customer demand and operational benefits versus investment (whilst also taking into consideration the time required to obtain the necessary permits). However, in a competitive rollout scenario, the geographical prioritisation needs to consider competitors’ rollouts in an attempt to achieve first-mover advantage (see Exhibit 9). Operators should only go head-to-head with major competitors in a given geographical area if either breakeven can be achieved with low take-up or the operator has an operational advantage, e.g. an efficient network process, an enhanced offer or a superior sales process.

Insight for operators: The first (and most-efficient) mover in an area reaps the greatest benefits.

5. Network rollout leverages existing infrastructure

Fixed incumbents have four key considerations in terms of network rollout: greenfield deployments, network upgrades, deployment efficiency and legacy network decommissioning (see Exhibit 10). For a mobile operator or alternative fixed operator, the only relevant areas of consideration are greenfield deployments and deployment efficiency. However, even these players should understand fixed incumbents’ considerations in order to be able to optimally prioritise rollout areas.

Firstly, the operator must have a strategy to roll-out the network in greenfield areas, in particular in selected emerging markets where burgeoning new urban areas may have significant market potential. Collaborating with municipalities and developers is critical for minimising the cost to reach the building with fibre and ensuring in-building/in-gated community fibre or duct availability.

Secondly, the operator needs to take a long-term view on network upgrades. In most cases the optimal ten-year view will include a mixture of areas with FTTH/B, xDSL and LTE only. However, pursuing a short-to-medium term xDSL path in areas where the optimal long-term decision is FTTH or LTE is risky, leading to inefficient network design and capex deployment. This is a result of operators needing to deploy remotes (e.g. MSANs) to shorten the copper loop for VDSL, as opposed to FTTH/B rollout architecture, which reduces the number of remote sites and exchanges.

In emerging markets, existing copper access tends to cover long distances and requires significant investment in remote sites to achieve high synch rates. Poor copper quality further limits upgrade techniques such as VDSL and vectoring. These limitations, combined with new urban developments that require greenfield deployment and the opportunity for opex savings by optimising network topology, create a compelling case for operators to focus on FTTH/B, explaining the multiple, simultaneous rollouts identified in Exhibit 2.

Thirdly, to minimise capex operators need to best make use of existing infrastructure or infrastructure from municipalities and utility companies. Four key issues need to be considered: 1) joint rollout planning for GPON/NG-PON2 and Active Ethernet for all segments (residential, SME, corporate, mobile transmission and wholesale); 2) use of external infrastructure such as existing ducts, deployment of fibre inside water/sewage pipes or overhead on electrical poles; 3) where trenching is required: partnering, trenching technologies, deployment planning and taking a long-term view of fibre needs, and; 4) having an in-building/in-community tool box for efficient connection solutions.

Finally, operators need to devise a plan to migrate legacy services to fibre with a view to eventually decommissioning legacy technologies. This may be a challenge as there is usually a significant price premium on legacy services (thus the migration may lead to revenue decline) and customers may oppose the need to change their premises equipment.

Insight for operators: The network rollout needs to be based on a comprehensive long-term view of segments and consider all infrastructure-sharing alternatives.

Experience shows that in countries with competitive FTTH/B and cable networks, the competition may at an early stage focus on offering more bandwidth to avoid pure price competition. FTTH/B GPON technology currently enables offers up to 1Gbps downlink (2.5Gbps downlink / 1.24Gbps uplink per PON up to 32 customers). Operators may even opt to offer symmetrical 1Gbps through Active Ethernet, whereby each customer has a dedicated fibre (P2P), given the additional capex is only ~10% more than for GPON. Though ONTs for Active Ethernet are more expensive, scale is bringing these prices down.

Fibre-based technologies are called “future proof” because they enable easy upgrades. Some operators are already planning NG-PON2, which will enable up to 40Gbps downlink/10Gbps uplink per PON up to 128 customers.

Thus while planning the technical and portfolio rollout, the possibility of offering high bandwidth services in the near future must be considered.

From Delta Partners’ experience, the reduction of network elements and deployment of more reliable technology that can be centrally controlled allows a reduction of more than 50-60% of the network field force (once FTTH/B rollout is completed).

Insight for operators: The network staff (employees and contractors) efficiency plan needs to be driven by the network evolution plan.

Conclusion

In conclusion, most operators present in markets with the potential for 4/5P offers must roll-out FTTH/B, despite the uncertain standalone business case and likely competition. Given these challenges, achieving a flawless rollout is critical, meaning operators must address the following challenges: 1) developing a strong service offering/ecosystem beyond connectivity; 2) determining the extent of network investment versus rollout to pass and connect homes; 3) defining the sales approach to drive rapid take-up; 4) right-sizing the network (technology, sites and operations), and; 5) identifying and implementing best practices through an organisation resourced with top talent and, critically, driven by an entrepreneurial mindset.